Venture Capital Funds

According to Wikipedia, a venture capital fund is a pooled investment vehicle (often in the form of a limited partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships.

This form of raising capital is popular among new companies, or ventures, with a limited history of operation, who are having trouble raising necessary funds. Usually, firms that provide venture capital generally have around $25 million to $1 billion to invest in emerging companies. However, venture capital is a form of private equity, and like many private equity funds, the manager wants a significant stake in the business, sometimes in the form of a leadership or decision-making role.

Venture capital is not easy to acquire, though it is sought after by a large number of small companies. Most firms that provide venture capital go through a very selective process and only invest in companies where they see huge growth potential. Since their paychecks are directly related to how well the companies perform, their selection process involves a detailed approach into their business strategy, management, and the company’s objectives.

Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds.

Typically, venture capital funds require a 10 year commitment, unlike other hedge funds that aim for significant returns in a shorter period of time. Like hedge funds, the general partners in a venture capital fund receive management fees of 2% of the assets. In addition, they also charge a performance fee usually around 20%-30% for profits, or “carried interest.”

In fact, Sequoia Capital, listed here for both early and later stage companies, is rumored to be raising over $750 million to start a hedge fund. Sequoia invests in technologically savvy companies including Apple and Yahoo, and has been adding former hedge fund managers recently to their roster of talent.